Swaps Pay $3.6 Billion At Most on U.S. Trigger, ISDA Says

Oct. 11 (Bloomberg) -- Sellers of credit-default swaps
protecting against a U.S. default would pay $3.6 billion at most
if the government failed to meet its obligations, according to
the International Swaps and Derivatives Association’s David
Geen.

“That’s the maximum potential payout there could possibly
be, even if after the auction we would hold, the value of the
U.S. government bonds was zero, which obviously wouldn’t be the
case,” Geen, the general counsel of the group of banks and
investors that governs the market, said today in a Bloomberg
Television interview. “It’s a chunky amount, but in the scheme
of things, it’s not large.”

Banks, hedge funds and other money managers had bought and
sold credit swaps protecting a net $3.6 billion of obligations
of the world’s biggest borrower as of Oct. 4, according to the
Depository Trust & Clearing Corp., which runs a central
repository for the market.

The cheapest Treasuries that would probably be eligible to
set the swaps contract’s value have been trading at about 83
cents on the dollar, Barclays Plc analysts wrote in an Oct. 9
report. That means traders betting on a U.S. default through
credit swaps would receive an aggregate $612 million.

After estimates from analysts that as much as $400 billion
in credit swaps were tied to Lehman Brothers Holdings Inc.,
raising concerns that hedge funds and others would struggle to
make good on the bets, DTCC said only $5.2 billion had to be
paid out.

The cost of one-year swaps on the U.S. government have
climbed to a mid-price of 60.5 basis points as of 12:19 p.m. in
New York, from 34 basis points on Oct. 1, according to data from
CMA, which is owned by McGraw Hill Financial and compiles prices
quoted by dealers in the privately negotiated market.